If I'm a developer building streets, roads, or sewer/water lines in a subdivision that I plan to donate to the county, can my contractor buy materials tax-free?

Subject

Dedicated Improvements (Streets, Roads, Sewer/Water Lines, Water Treatment Plant, Levee) Accepted By Governmental Entities — Guidelines

Plain-English summary

A taxpayer asked the Comptroller what a developer needs to do to get tax-exempt treatment on infrastructure built for a subdivision -- things like streets, roads, and sewer/water lines -- that will ultimately be donated ("dedicated") to a county. The Comptroller calls this "development work": improving real property for a private party (the developer) who intends to give the improvements to a governmental entity.

The key timing rule: the developer must have irrevocably dedicated the property and improvements, and the governmental entity must have conditionally or unconditionally agreed to accept them, before construction work begins. If work starts before that dedication and acceptance take place, no exemption applies to that work -- exemptions can only be claimed going forward from the point of dedication and acceptance. The government's acceptance decision must be recorded in its meeting minutes, and the appropriate maps or plats must be filed.

Because a contract between a contractor and a private developer is presumed not exempt, the contractor must overcome that presumption by getting acceptable documentation from the developer -- in good faith, at the time the contract is signed -- showing the realty has been dedicated to and accepted by a governmental entity. A letter of acceptance or other signed written confirmation from an authorized representative of the government is enough to satisfy the contractor's diligence obligation. If the exemption isn't clearly established, the contractor can ask the developer for more proof.

Once the contractor has that documentation, it can issue its own exemption certificate to its suppliers when buying incorporated materials, qualifying consumable materials, and qualifying taxable services for the job. The contractor still owes tax on machinery, equipment, and any other taxable items that don't qualify for the exemption, even if used to perform the development work. The letter cites Tex. Tax Code § 151.311 as the source of these exemptions: subsection (a) covers incorporated materials, subsections (b) and (d) cover consumable materials, and subsection (c) covers qualifying taxable services.

What this means for you

Developers dedicating infrastructure to a government

Line up the dedication and the government's acceptance -- including the recorded minutes and filed maps/plats -- before any construction begins. Starting work first forfeits the exemption for that work; only work performed after dedication and acceptance can qualify.

Contractors building the infrastructure

Don't assume a developer's contract is tax-exempt. Get a properly completed exemption certificate or a written statement from the developer, obtained in good faith when the contract is signed, confirming the property has been dedicated to and accepted by the government. A signed letter of acceptance from the government is sufficient backup. You can then issue your own exemption certificate to suppliers for incorporated materials, qualifying consumables, and qualifying taxable services -- but you still pay tax on machinery, equipment, and other non-qualifying purchases.

Accountants and tax professionals

The exemption turns on documented timing (dedication and acceptance before work starts) and on the contractor's good-faith diligence in obtaining proof from the developer. The statutory basis is Tex. Tax Code § 151.311, which separately addresses incorporated materials, consumable materials, and taxable services.

Common questions

Q: Can a contractor buy materials tax-free the moment a developer says infrastructure will be donated to the county?
A: No. The dedication must be irrevocable and the governmental entity must have agreed to accept the property, with that acceptance recorded in minutes and reflected in filed maps/plats, and all of this must happen before construction begins.

Q: What if construction already started before the dedication and acceptance were finalized?
A: The exemption does not apply to work done before dedication and acceptance took place; it can only be claimed from that point forward.

Q: What does a contractor need from the developer to claim the exemption?
A: A properly completed exemption certificate or other written statement, obtained in good faith at the time the contract is executed, explaining that the realty has been dedicated to and accepted by a governmental entity. A signed letter of acceptance from the government is sufficient proof.

Q: Does the exemption cover everything the contractor buys for the job?
A: No. It covers incorporated materials, qualifying consumable materials, and qualifying taxable services under Tex. Tax Code § 151.311. The contractor still owes tax on machinery, equipment, and other taxable items that don't qualify, even when used for the development work.

Citations and references

Statutes:

• Tex. Tax Code § 151.311 (exemption for incorporated materials, consumables, and qualifying taxable services used in development work dedicated to a governmental entity)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9604L1408G12

Original ruling text

April 12, 1996

Dear **:

I am responding to your request for a written explanation of what is required
for a developer to acquire tax exempt status for taxable items purchased for
the infrastructure of a subdivision to be dedicated to your county. In our
telephone conversation, you referred to the changes effective October 1, 1993,
and after.

"Development work" means improving real property for a private party who
intends to donate the improvements to a governmental entity. The contractor
performing the work for the developer may claim an exemption from tax on
certain purchases when specific conditions are met. The following paragraphs
set out the conditions and the responsibilities of the parties involved.

The developer must have irrevocably dedicated the realty and improvements
to the governmental entity. The governmental entity must have conditionally
or unconditionally agreed to accept the realty and the improvements at a
future date. This dedication and acceptance must take place before the work
begins for exemptions to apply. If the work begins before the dedication
and acceptance take place, the exemptions will not apply. Exemptions may be
claimed from the time of dedication and acceptance forward. The governmental
entity must record their decision to accept the realty and improvements in
the minutes of the meeting, and the appropriate maps or plats must be filed.

A contractor must presume that a contract with a private party (developer)
is not an exempt contract. This presumption may be overcome by the
contractor's obtaining acceptable documentation from the developer. A
contractor must obtain, in good faith and at the time the contract is
executed, a properly completed exemption certificate or other written
statement from the customer (developer) explaining that the realty being
improved has been dedicated to and accepted by a governmental entity. If
the claimed exemption is not clear, the contractor may request additional proof
of exemption from the customer. A letter of acceptance or other written
confirmation signed by an authorized representative of the governmental entity
is sufficient to relieve the contractor from further inquiry.

Once the acceptable documentation has been obtained, the contractor may
issue its exemption certificate to suppliers when purchasing incorporated
materials, qualifying consumables, and qualifying taxable services. The
contractor must pay tax on machinery, equipment, and all other taxable
items not qualifying for the exemption even when used to perform the
development work.

I have enclosed a copy of 151.311 setting out these exemptions. Incorporated
materials are exempted in section (a); sections (b) and (d) set out the
exemption and qualifications for consumable materials; section (c)
identifies and exempts qualifying taxable services.

This opinion is based upon the facts presented. If there are additional
or different facts, this opinion may change.

If you have other questions or require additional information, you may
write Tax Policy Division, Comptroller of Public Accounts.

Sincerely,

Tax Policy Division

NOTE: Previous Accession Number 9604153L